CHAPTER 4

POLITICS AND LAWS

Chapter Objectives

  • To understand the importance of the political and legal environments in both the home and host countries to the international business executive
  • To learn how governments affect business through legislation and regulations
  • To see how the political actions of countries expose firms to international risks
  • To examine the differing laws regulating international trade found in different countries
  • To understand how international political relations, agreements, and treaties can affect international business

Opening Case
Corruption, Guns, and Terrorism
Summary:
This case describes how Afghanistan and Pakistan relied on illegal trade of contraband and drugs for mutual benefit and how Afghan warlords took control of this trade to deal with political chaos after the September 11 attack on the U.S.
President Mugabe of Zimbabwe confiscated white-owned farms for redistribution, but corruption has resulted in idle land and caused a disruption of farming an increase in unemployment and inflation. The Mugabe administration also refuses to devalue its currency making economic management impossible. This situation threatens the peace, stability, and prosperity of the region.

Chapter Outline

I.The Home-Country Perspective

  1. Many laws and regulations have a major impact on international business even though not intended to do so
  2. Minimum wage laws
  3. Domestic safety regulations
  4. Some laws and regulations are designed to help domestic firms
  5. Nations attempt extra-territoriality—setting policy outside territorial limits
  6. Embargoes and Sanctions
  7. Government actions that distort free flows in goods, services, or ideas for adversarial an political purposes
  8. Sanctions—specific coercive trade measures
  9. Incorporated into law under the League of Nations and then the United Nations
  10. Not always enforceable
  11. Rarely successful
  12. Means significant loss to businesses
  13. Embargoes—prohibit trade entirely
  14. Often used in times of war
  15. Used as tools of foreign policy
  16. Export Controls—to deny or delay the acquisition of strategically important goods by adversaries
  17. Controlled by export licenses issued by Department of Commerce compared with the critical commodities list
  18. Most items in international business are done under NLR (No License Required) conditions
  19. A New Environment for Export Controls
  20. With increased terrorism came tighter controls on the Third World
  21. Loosening of mutual bonds among allied nations
  22. Changes due to increased foreign availability of high technology products and the increased pace of their development and dissemination
  23. Miniaturization of technology makes control more difficult
  24. Disagreements over what constitutes military-use items
  25. With the growth of economic unions (EU and NAFTA) implementation is more difficult

Focus on Politics
Space Secrets Sold!
Summary:
This vignette tells how Hughes Electronics (and Boeing who bought that company) reached a settlement to pay a fine and improve its internal program of prevention for providing controlled rocket launching technology to the Chinese. This company as well as Loral Space & Communications Company (who settled with a lesser fine earlier) was responding to pressure in China to transfer technology to help in its program of launching satellites that U.S. firms are allowed to use for satellite launches. To improve the success of rockets launching satellites and to satisfy investigates of insurance companies faced with claims for failures, Hughes provided technical information. Rather than face stiffer fines and more export restrictions, the company agreed to pay a fine and spend money on improving its controls.
  1. Regulating International Business Behavior
  2. Countries regulate international behavior within moral and ethical boundaries considered appropriate by that country
  3. What is considered appropriate may vary from one country to another
  4. Boycotts of products from unfriendly nations may be organized
  5. Antitrust laws may be applied internationally
  6. Laws against bribery and corruption such as the Foreign Corrupt Practices Act passed in the U.s. in 1977
  7. General standards of behavior and ethics varies from one country to another

Focus on Politics
Whaddaya Mean “French”?
Summary:
This is a description of an effort to terminate U.S. military contracts with Sodexho, a French-owned catering firm. One problem with that is that this U.S. subsidiary employs 110,000 Americans. Making official reprisals against private companies for the political positions of their home countries is not a desirable action. The CEO of Sodexho made a statement of support for U.S. troops.

II.Host Country Political and Legal Environment

  1. Political Action and Risk
  2. Depends on the stability of the country
  3. Ownership risk—exposes property and life
  4. Operating risk—interference with ongoing operations
  5. Transfer risk—attempts to transfer funds between countries (Figure 4.2, page 113)
  6. Coups d’état—results in drastic changes in government
  7. Expropriation—transfer of ownership by host government to a domestic entity with payment of compensation (which may not be the full value)
  8. Confiscation—transfer of ownership without compensation
  9. Domestication—transfer of ownership and management responsibility by impose local content regulations, changing labor laws, patent protection, and tax regulation
  10. Poor cooperation and communication can result
  11. Can increase costs
  12. Can decrease competition with foreign firms
  13. Intellectual property right (IPR) protection needed to keep competitive edge
  14. Economic Risk
  15. Exchange Controls—to limit the flow of foreign currency out of a country
  16. Tax Policy—to control multinational corporations and their capital and raise revenue
  17. Price Controls—to limit price fro consumers of important items politically viewed
  18. Managing the Risk
  19. Demonstrate concern with host country’s society and become a part of the country, not an exploiter of it
  20. Closely monitor political developments
  21. Purchase insurance to cover losses
  22. Legal Differences and Restraints
  23. The way laws are used varies by country and culture
  24. Theocracy—law according to God, scripture, prophetic utterances and practices, and scholarly interpretations
  25. Common law—based on tradition, precedent, and custom more than written statues and codes (England and U.S.)
  26. Code law—based on comprehensive set of written statutes
  27. The Influence of Politics and Laws
  28. Be aware of local laws and work with people who know how to operate within the system
  29. One option is to ignore prevailing rules and expect to get away with it, but this is a high-risk strategy
  30. Traditional option is to provide input to trade negotiators and expect any problem areas to be resolved in multilateral negations
  31. Third option is to develop coalitions an constituencies that can facilitate change
  32. Lobbying
  33. Public/government relations
  34. Industry alliances and associations
  35. Political incentives

III.International Relations and Laws

  1. Government-to-government relationships affect international business
  2. International Law—determined by treaties and agreements
  3. World Trade Organization (WTO) defines internationally acceptable economic practices for its member nations
  4. The Patent Cooperation Treaty (PCT) provides procedures for filing one international application designating countries in which a patent is sought
  5. United Nations
  6. Organization for Economic Cooperation and Development
  7. Bilateral Treaties of Friendship, Commerce, and Navigation (FCN)
  8. Jurisdiction is always an issue
  9. Arbitration may be used to solve disputes